The Market Today

TODAY’S CALENDAR

Firmer Inflation and Weaker Retail Sales:  January’s inflation report showed stronger-than-expected inflation at both the headline and core levels.  Headline inflation rose 0.5% as energy prices rose 3.0% MoM on oil prices averaging 5% higher in January than they did in December.  The energy spike appears likely to be short-lived as oil prices have dropped 11% since the early-February market turmoil.  Headline inflation held at 2.1% YoY.  Prices rose 0.3% in January at the core level (excluding food and energy prices) but were revised from +0.3% to +0.2% for December.  Nonetheless, the YoY rate of core inflation held at 1.8% rather than dropping to 1.7% as expected.  Looking at the big core items, shelter prices were a touch softer than the recent run rate, rising 0.25% MoM.  This was driven primarily by a 2.0% MoM drop in lodging prices.  Despite the slight weakness in shelter prices, the YoY rate held steady at +3.2%.  Medical care prices, which have shown quite a bit of volatility over the past two years, were firmly stronger rising 0.4% MoM (+0.2% MoM average over the past year).  Medical care prices on a YoY basis have now rebounded from +1.6% back in September to +2.0%.  New and used car prices rose 0.3% MoM which was firmer than the recent run rate of +0.0 (12-month average).  Apart from the big items, apparel prices were remarkably stronger (+1.7% MoM), other goods and services were stronger (+0.4% MoM), and education and communication prices were more stable (+0.1% MoM).  This left only recreation prices at a weaker rate of price gains than their 12-month average, +0.0% MoM versus +0.1% MoM.  Bottom line – much better traction in medical care prices helped lead a broadly stronger-than-expected increase in consumer prices.  The strength in auto and apparel prices is likely to be short-lived.

 

In contrast to the inflation data, the retail sales data were weaker-than-expected across the board.  Headline sales fell 0.3% MoM versus expectations of a 0.2% increase. This was despite a 1.6% MoM boost from gasoline sales.  Building material sales were notably weak, down 2.4% MoM and auto sales dropped off 1.3% MoM.  At the core level, sales were flat in January, disappointing expectations of a 0.4% increase.  December’s core sales were also revised lower from +0.3% to -0.2% and November’s sales down from +1.4% to +1.2%.  This will likely cut into the 4Q GDP tally on weaker-than-initially-reported personal consumption.  Looking at the more granular data, every category of retail sales showed a decline in January versus the average from the 4^th quarter.  While it is only one month of data, it points to a much weaker start to 2018 for the consumer than expected.

 

The initial market response was, though less severe, directionally reminiscent of the moves following the January hourly earnings results: U.S. equity futures sold off, Treasury yields jumped between 4 and 5 bps, and the Dollar spiked.

 

TRADING ACTIVITY

Yesterday – Equity Waters Calm, 2s/10s Spread Flattens by the Second Most Since 2016: Tuesday’s equity trading was a tale of two halves as first-half losses gave way to after-lunch gains which helped nudge the major U.S. indices higher for a third consecutive session. For all of Tuesday, the Dow added 39 points, or 0.16%, while the S&P rose 7 points, or 0.26%, and the Nasdaq advanced 32 points, or 0.5%. Despite the intraday ups and downs, the Dow and S&P both traded within their tightest daily range since the recent turmoil started on February 2. The S&P 500 rose on relatively broad sector participation as 9 of 11 of the Level 1 groupings managed daily gains. Energy companies fared the worst, falling even as a weakening Dollar helped buoy oil prices. However, a larger-than-expected build in U.S. inventories knocked crude prices in after-hours trading. The Dollar leveled off in U.S. trading but a negative daily result was well cemented thanks to a steep overnight decline. Even with equities stabilized, longer Treasury yields moved lower with the 10-year yield dropping roughly 2.9 bps to 2.83%. The 2-year yield, however, rose 2.9 bps to 2.10%, flattening the curve between 2s and 10s by the second most in a single day since 2016.

 

Overnight – Markets Mixed Ahead of Inflation, After Uneven Global Growth Results: U.S. assets made modest directionally dovish shifts in anticipation of this morning’s CPI inflation report for the month of January. The all-important CPI inflation data has heightened importance this go around because of the significant market volatility that followed a hotter-than-expected hourly earnings figure a couple of weeks ago. Before the report was released, the Treasury curve was flatter with the 2-year yield up 0.6 bps and the 10-year yield down 1.1 bps, the Dollar was slightly weaker, and equity futures were up 0.5% on average. The move in the yield curve was consistent with flatter, lower yield curves across most major global economies. European equities had strengthened after a mixed start in Asia. Japan’s Nikkei slumped the most after the yen reached a new 15-month high following a weaker-than-expected GDP report. The Japanese economy grew 0.5% annualized in 4Q17, half of estimates and its weakest quarter since 2015, but steady private domestic demand was dulled by an inventory draw and trade. The European economy maintained its recent momentum into the end of 2017, growing 0.6% QoQ and 2.7% YoY in 4Q.

 

NOTEWORTHY NEWS

Consumer Credit Rose for 14^th Quarter in a Row: The NY Fed’s Quarterly Report on Household Debt and Credit showed outstanding debt rose $193B in 4Q17 to $13.1T, $473B higher than the peak of $12.7T just prior to the recession. Four of the five major categories increased from 3Q17 with a $4B decline in outstanding HELOC balances marking the sole decline. The updated outstanding figures showed mortgage debt higher by $139B to $8.9T, student loan debt up $21B to $1.4T, an $8B increase in auto loan debt taking the total to $1.2T, and $26B in additional credit card balances lifting the total to $834B. Total balances considered “severely derogatory”, or 90+ days past due, ticked down from 3.19% to 3.12% as improvement in the mortgage category offset worse results in other line items. There was broader improvement in the early roll rate into the first 30+ days past due delinquency bucket. New foreclosures and bankruptcies remained at their best levels of the cycle as did the percent of customers with a third party collection company.

 

Cleveland’s Mester Sees Little Impact to “Very Sound” U.S. Economy from Recent Turmoil: Cleveland Fed President Loretta Mester (voter) became the latest official to go on the record with an expectation that the ramped up market volatility won’t shake the “very sound” fundamentals underlying the U.S. economy. Mester said, “While a deeper and more persistent drop in equity markets could dash confidence and lead to a pullback in risk-taking and spending, the movements we have seen are far away from this scenario, …I expect the economy will work through this episode of market turbulence and I have not changed my outlook. In my view, the underlying fundamentals supporting the economy are very sound. …If economic conditions evolve as expected, we’ll need to make some further increases in interest rates this year and next year, at a pace similar to last year’s [three-hike pace].” Mester was in the headlines again later Tuesday afternoon after the WSJ reported she was being considered for the open Fed Vice Chair position.

 

Jay Powell Lauds Economic Progress, Pledges Alertness to Financial Stability Risks: In his ceremonial swearing-in speech, after tipping his hat to his predecessors Bernanke and Yellen for a job well done, Jay Powell pledged a continuation of the approach that has helped the U.S. economy heal from the wounds caused by that Great Recession. In his closing remarks, Powell said, “While the challenges we face are always evolving, the Fed’s approach will remain the same. Today, the global economy is recovering strongly for the first time in a decade. We are in the process of gradually normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives. We will also preserve the essential gains in financial regulation while seeking to ensure that our policies are as efficient as possible. We will remain alert to any developing risks to financial stability.”